Facebook spent $2 billion on Oculus VR, a company that makes virtual reality headsets; the headsets make some people nauseous.

Jae C. HongAP

Over the past few months, the country's biggest technology firms have spent billions buying startups. Are we watching another tech bubble about to burst?

In this year's first quarter, Google and Facebook, alone, announced deals worth more than $24 billion on little companies that have almost no revenue. Those deals seem to have spooked Wall Street; last week, technology stocks plunged and the tech-heavy Nasdaq index fell nearly 1.2 percent Monday.

The case that this is a bubble is easy to make. Just take a look at Oculus VR. Facebook recently spent $2 billion for this company, which makes a virtual reality headset called the Oculus Rift. Oculus is barely 2 years old and still doesn't have a consumer product — and using its headset can leave some people feeling nauseous.

Peter Hawley, the founder and CEO of Red Robot Labs, a gaming company in Mountain View, Calif., takes me on a virtual reality tour of a villa on the Italian coast via the Oculus Rift.

Butterflies flutter in front of my nose. I see ocean waves breaking against cliffs in the background as I float through the scene. I put my head between my legs and I can see behind me, but the world flips upside down and I realize that this virtual me doesn't have any legs.

Suddenly, I need to sit down.

"How do you feel?" Hawley asks. I feel queasy.

"Already?" he says. It's not my proudest moment, though this is definitely the one that makes people feel ill, he says.

Virtual reality is a powerful thing and can be powerfully disorienting. Actually, that's a pretty good metaphor for the tech economy right now.

"We live in this insane bubble here, where these valuations are just beyond the comprehension of some," Hawley says.

When he says "bubble," he's not talking about an investment bubble. He's referring to a specific place: Silicon Valley, where the big companies worth hundreds of billions generate billions of dollars in profit each quarter.

"I just mean bubble in terms of understanding, what does it mean for a company like Facebook to spend 2 billion?" Hawley says. "And to look at what does that actually mean in terms of cash and stock breakdown. And what does that mean to them as a large company?"

Hawley is a virtual reality optimist. He says Facebook may have bought itself a powerful new platform. In five years, people might look back and say that $2 billion for Oculus was a steal.

He says that for Facebook, this amounts to a small bet. But, really, only people living inside the Silicon Valley bubble can see $2 billion that way.

The sizes of some of the recent deals here have left even seasoned Silicon Valley insiders rubbing their eyes.

"I must admit when I first saw the WhatsApp valuation I thought I needed to get bifocals," says Peter Nieh, a venture capitalist at Lightspeed. "I thought I must have missed a decimal point."

In February, Facebook bought WhatsApp, which offers a free text messaging alternative, for $19 billion. At the time, Nieh was thinking WhatsApp was worth maybe $1.5 billion or $2 billion.

It's not like Nieh has been sitting on the sidelines. He's an investor in Snapchat and Nest, which Google bought for $3.2 billion in January.

"Tech has become a more pervasive part of our lives, so it does make sense that the valuations for tech companies should increase. It's to what extent?" Nieh says. "It seems that some of these valuations are very frothy."

Google and Facebook have gotten into bidding wars with one another, driving the value of some promising startups to stratospheric heights. The tech giants' own soaring stocks have made all this seem affordable.

It all encourages big risk.

"There will be some spectacular failures," says Charley Moore, a technology attorney who has lived through three booms and busts here. He says that bubbles are not such a bad thing.

"It's really times like this that don't come around every day, that you see the kind of experimentation and risk-taking that, really, Silicon Valley is known for."

After all, Intel spent millions in the 1970s trying to build a smart watch; it was a total failure. But other bets the company made at the same time helped build a multi-hundred-billion-dollar business.

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Transcript

AUDIE CORNISH, HOST:

From NPR News, this is ALL THINGS CONSIDERED. I'm Audie Cornish.

MELISSA BLOCK, HOST:

And I'm Melissa Block.

We begin this hour with ALL TECH CONSIDERED. Today, the buying spree in Silicon Valley. Over the past few months, the country's biggest technology companies have opened their wallets. Google and Facebook alone announced deals worth more than $24 billion. And they're spending these billions on small companies with almost no revenue.

It all seems to be spooking Wall Street. Technology stocks plunged last week. And today, the tech-heavy NASDAQ closed down 1.1 percent. So we wondered, are we watching another tech bubble burst? Here's NPR's Steve Henn.

STEVE HENN, BYLINE: The case that this is a bubble is pretty easy to make. Just take Oculus VR. Facebook recently spent $2 billion for this company, which makes a virtual reality headset, $2 billion. This for a company that's barely two years old, still doesn't have a consumer product. And using their headset sometimes leaves people feeling nauseous.

PETER HAWLEY: Well, it's upside down. Is that because the helmet's upside down? It's as if - it's like you fell over, Steve, you know what I mean? So put that on.

HENN: Peter Hawley is the founder and CEO of Red Robot Labs, a gaming company in Mountain View. And he's using the Oculus Rift to take me on a virtual reality tour of a villa on the Italian coast. Butterflies flutter in front of my nose. I see ocean waves breaking against cliffs in the background as I float through the scene. I make a quick move and suddenly I need to sit down.

HAWLEY: How do you feel?

HENN: I feel a little queasy.

HAWLEY: Already?

HENN: Not my proudest moment.

HAWLEY: This is definitely the one that makes you feel ill.

HENN: Virtual reality is a powerful thing and can be powerfully disorienting. Actually, that's a pretty good metaphor for the tech economy right now.

HAWLEY: Obviously, we live in this insane bubble here where these valuations are just beyond the comprehension of some.

HENN: When Peter Hawley says bubble, he's not talking about an investment bubble. He means this place, Silicon Valley, where big companies generate billions of dollars in profits each quarter and are worth hundreds of billions.

HAWLEY: The comprehension of these kinds of numbers, you know? But I just mean bubble in terms of understanding what does it mean for a company like Facebook to spend two billion.

HENN: Hawley is a virtual reality optimist. He thinks that Facebook may have bought itself a powerful new platform. And in five years, people could look back and say that $2 billion for Oculus was a steal. But the size of some of the recent deals here have left even seasoned Silicon Valley insiders rubbing their eyes. Peter Nieh is a venture capitalist at Lightspeed.

PETER NIEH: I mean, I must admit that when I first saw the WhatsApp valuation, I thought I needed to get bifocals because I thought I might have missed a decimal point.

HENN: Facebook bought WhatsApp, which offers a free text messaging alternative, for $19 billion in February. At the time, Nieh was thinking WhatsApp was worth maybe one and a half or $2 billion.

NIEH: So we're talking - my sense of things was that it was closer to an order of magnitude less as opposed to what it was.

HENN: And it's not like Peter Nieh has been sitting on the sidelines. He's an investor in Snapchat and Nest, which Google bought for 3.2 billion in January.

NIEH: Tech has become a more pervasive part of our lives, and so it does make sense that valuations for tech companies should increase. It's to what extent, you know? It seems like some of these valuations are very frothy.

HENN: Bidding wars between Google and Facebook have driven the value of some promising startups to stratospheric heights. Their own soaring stocks have made this all seem affordable. It all combines to encourage big risks. And...

CHARLIE MOORE: There'll be some spectacular failures.

HENN: But Charlie Moore, a technology attorney, who's lived through three booms and busts here, says bubbles are not always such a bad thing.

MOORE: It's really times like this that don't come around every day that you see the kind of experimentation and risk-taking that really Silicon Valley is known for.

HENN: After all, Intel spent millions of dollars in the 1970s trying to build a smart watch. It was a total failure. But other bets the company took at the same time helped build a multi-hundred-billion-dollar business. Steve Henn, NPR News, Silicon Valley. Transcript provided by NPR, Copyright NPR.